Kroger Co. et al.; Analysis To Aid Public Comment

FEDERAL TRADE COMMISSION

[File NO. 9910024]

Kroger Co. et al.; Analysis To Aid Public Comment

AGENCY: Federal Trade Commission.

ACTION: Proposed consent agreement.

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SUMMARY: The consent agreement in this matter settles alleged

violations of federal law prohibiting unfair or deceptive acts or

practices or unfair methods of competition. The attached Analysis to

Aid Public Comment describes both the allegations in the draft

complaint that accompanies the consent agreement and the terms of the

consent order--embodied in the consent agreement--that would settle

these allegations.

DATES: Comments must be received on or before August 6, 1999.

ADDRESSES: Comments should be directed to: FTC/Office of the Secretary,

Room 159, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580.

FOR FURTHER INFORMATION CONTACT:

Jill Frumin, FTC/S-2105, 601 Pennsylvania Avenue, N.W., Washington,

D.C. 20580, (202) 326-2758.

SUPPLEMENTARY INFORMATION: Pursuant to Section 6(f) of the Federal

Trade Commission Act, 38 Stat. 721, 15 U.S.C. 46, and Section 2.34 of

the Commission's Rules of Practice, 16 CFR 2.34, notice is hereby given

that the above-captioned consent agreement containing a consent order

to cease and desist, having been filed with and accepted, subject to

final approval, by the Commission, has been placed on the public record

for a period of sixty (60 days. The following Analysis to Aid Public

Comment describes the terms of the consent agreement, and the

allegations in the complaint. An electronic copy of the full text of

the consent agreement package can be obtained from the FTC Home Page

(for May 27th, 1999), on the World Wide Web, at ``http://www.ftc.gov/

os/actions97.htm.'' A paper copy can be obtained from the FTC Public

Reference Room, Room H-130, 600 Pennsylvania Avenue, N.W., Washington,

D.C. 20580, either in person or be calling (202) 326-3627.

Public comments is invited. Comments should be directed to: FTC/

Office of the Secretary, Room 159, 600 Pennsylvania Avenue, N.W.,

Washington, D.C. 20580. Two paper copies of each comment should be

filed, and should be accompanied, if possible, by a 3\1/2\ inch

diskette containing an electronic copy of the comment. Such comments or

views will be considered by the Commission and will be available for

inspection and copying at its principal office in accordance with

Section 4.9(b)(6)(ii) of the Commission's Rules of Practice (16 CFR

4.9(b)6)(ii).

Analysis of the Proposed Consent Order and the Draft Complaint To

Aid Public Comment

I. Introduction

The Federal Trade Commission (``Commission'') has accepted for

public comment from The Kroger Co. (``Kroger'') and Fred Meyer Stores,

Inc. (``Fred Meyer'') (collectively ``the Proposed Respondents'') an

Agreement Containing Consent Order (``the proposed consent order'').

The Proposed Respondents have also reviewed a draft complaint

contemplated by the Commission. The proposed consent order is designed

to remedy likely anticompetitive effects arising from the merger of

Jobsite Holdings, Inc. (``Jobsite''), a wholly-owned subsidiary of

Kroger, with and into Fred Meyer (the ``Merger''), through which Fred

Meyer will become a wholly-owned subsidiary of Kroger.

II. Description of the Parties and the Proposed Acquisition

Kroger, an Ohio corporation headquartered in Cincinnati, Ohio,

operates over 1,400 supermarkets in 23 states. Kroger's supermarkets

operate under the ``Kroger,'' ``Fry's,'' ``Dillons,'' ``King Soopers,''

``City Markets,'' and ``Gerbes'' trade names. In the states where

Kroger competes with Fred Meyer, Kroger operates supermarkets in

Arizona under the ``Fry's'' trade name and in Utah and Wyoming under

the ``City Market'' and ``King Sooper'' trade names. Kroger has plans

to open a supermarket in Cheyenne, Wyoming, under the ``King Sooper''

trade name. Kroger had $26.57 billion in United States revenues for the

fiscal year that ended on December 27, 1997. Following the merger,

Kroger will remain the largest supermarket firm in the United States.

Fred Meyer, a Delaware corporation headquartered in Portland,

Oregon, operates approximately 800 supermarkets in 12 western states.

Fred Meyer's supermarkets operate under the ``Smith Food & Drug

Center'' trade name in Arizona, Utah, and Wyoming, as well as the

``Fred Meyer'' trade name in Arizona and Utah, and the ``Price Rite''

trade name in Arizona. Fred Meyer had $14.88 billion in total sales for

the fiscal year that ended on January 31, 1999.

Pursuant to the Merger proposed by Kroger and Fred Meyer, Jobsite

will merge with and into Fred Meyer and Fred Meyer will become a

wholly-owned subsidiary of Kroger. As a result of the Merger, Fred

Meyer's outstanding shares of common stock will be extinguished and the

holder of each such share will be entitled to receive

[[Page 30330]]

one newly-issued share of common stock of Kroger in exchange for each

extinguished share of Fred Meyer common stock. The total equity value

of the proposed merger is approximately $15 billion.

III. The Draft Complaint

The draft complaint alleges that the relevant line of commerce

(i.e., the product market) is the retail sale of food and grocery items

in supermarkets. Supermarkets provide a distinct set of products and

services for consumers who desire to one-stop shop for food and grocery

products. Supermarkets carry a full line and wide selection of both

food and nonfood products (typically more than 10,000 different stock-

keeping units (``SKUs'')), as well as a deep inventory of those SKUs.

In order to accommodate the large number of food and nonfood products

necessary for one-stop shopping, supermarkets are large stores that

typically have at least 10,000 square feet of selling space.

Supermarkets compete primarily with other supermarkets that provide

one-stop shopping for food and grocery products. Supermarkets primarily

base their food and grocery prices on the prices of food and grocery

products sold at other nearby supermarkets. Supermarkets do not

regularly price-check food and grocery products sold at other types of

stores, and do not significantly change their food and grocery prices

in response to prices at other types of stores. Most consumers shopping

for food and grocery products at supermarkets are not likely to shop

elsewhere in response to a small price increase by supermarkets.

Retail stores other than supermarkets that sell food and grocery

products, such as neighborhood ``mom & pop'' grocery stores,

convenience stores, specialty food stores (e.g., seafood markets,

bakeries, etc.), club stores, military commissaries, and mass

merchants, do not effectively constrain prices at supermarkets. These

other stores operate significantly different retail formats. None of

these stores offers a supermarket's distinct set of products and

services that enable consumers to one-stop shop for food and grocery

products.

According to the draft complaint, the relevant sections of the

country (i.e., the geographic markets) in which to analyze the

acquisition are the areas in and near the following cities and towns:

(a) Prescott, Arizona; (b) Sierra Vista, Arizona; (c) Yuma, Arizona;

(d) Cheyenne, Wyoming; (e) Green River, Wyoming; (f) Rock Springs,

Wyoming; and (g) Price, Utah.

Kroger and Fred Meyer are actual and direct competitors in and near

Prescott, Sierra Vista, Yuma, Green River, Rock Springs, and Price.

Kroger is an actual potential competitor against Fred Meyer in and near

the Cheyenne relevant market. But for the acquisition, Kroger and Fred

Meyer would become direct competitors in the Cheyenne relevant market.

The acquisition will eliminate that competition.

According to the draft complaint, the Prescott, Sierra Vista, Yuma,

Arizona; Green River, Rock Springs, Wyoming; and Price, Utah, relevant

markets are highly concentrated, whether measured by the Herfindahl-

Hirschman Index (commonly referred to as ``HHI'') \1\ or by two-firm

and four-firm concentration ratios. The acquisition would substantially

increase concentration in each market. Kroger and Fred Meyer would have

a combined market share of near or greater than 35% in each geographic

market. The post-acquisition HHIs in the geographic markets range from

2,793 to 10,000.

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\1\ The HHI is a measurement of market concentration calculated

by summing the squares of the individual market shares of all the

participants.

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The draft complaint further alleges that the Cheyenne, Wyoming,

relevant market is also highly concentrated. The market will remain

highly concentrated as a result of this acquisition, and will be

significantly more concentrated than it would have been but for the

acquisition.

According to the draft complaint, entry is difficult and would not

be timely, likely, or sufficient to prevent anticompetitive effects in

the relevant geographic markets.

According to the draft complaint, the Agreement and Plan of Merger

between Kroger and Fred Meyer, pursuant to which Jobsite will merge

with and into Fred Meyer and Fred Meyer will become a wholly-owned

subsidiary of Kroger, may substantially lessen competition in the

relevant markets in violation of Section 7 of the Clayton Act, as

amended, 15 U.S.C. 18, and Section 5 of the Federal Trade Commission

Act, as amended, 15 U.S.C. 45, by eliminating direct competition

between supermarkets owned or controlled by Kroger and supermarkets

owned or controlled by Fred Meyer; by eliminating actual potential

competition between supermarkets owned or controlled by Kroger and

supermarkets owned or controlled by Fred Meyer; by increasing the

likelihood that Kroger will unilaterally exercise market power; and by

increasing the likelihood of, or facilitating, collusion or coordinated

interaction among the remaining supermarket firms. Each of these

effects increases the likelihood that the prices of food, groceries, or

services will increase, and the quality and selection of food,

groceries, or services will decrease, in the relevant sections of the

country.

IV. Terms of the Proposed Consent Order

The proposed consent order will remedy the Commission's competitive

concerns about the proposed acquisition. Under the terms of the

proposed consent order, the Proposed Respondents must divest eight

specific supermarkets in the relevant markets. Five of the supermarkets

that the Proposed Respondents must divest are currently owned and

operated by Kroger ( of which two operate under the ``Fry's'' banner

and three operate under the ``City Market'' banner), and three of the

supermarkets are currently owned and operated by Fred Meyer (all of

which operate under the ``Smith's'' banner). The Proposed Respondents

must divest: (1) Two Fred Meyer ``Smith's'' in Cheyenne, Wyoming, to

Nash-Finch Company (``Nash-Finch''), one of the largest food

wholesalers in the United States and an operator of many company-owned

supermarkets; (2) one Kroger ``City Market'' in Price, Utah, to

Albertson's, Inc., one of the largest retail food and drug chains

operating in the United States; and (3) two Kroger ``Fry's,'' two

Kroger ``City Markets,'' and one Fred Meyer ``Smith's'' in various

locations to Fleming Companies, Inc. (``Fleming''), the second-largest

supermarket wholesaler in the United States and an operator of many

company-owned supermarket. These divestitures include every Kroger

supermarket or every Fred Meyer supermarket in each relevant market.

Each upfront buyer owns no supermarkets in the same market where it is

acquiring one or more divested supermarkets from the Proposed

Respondents. The specific supermarkets that the Proposed Respondents

must divest to Nash-Finch, Albertson's, and Fleming are listed below.

The two supermarkets that the Proposed Respondents must divest to

Nash-Finch in accordance with the agreement between Kroger and Nash-

Finch dated March 31, 1999, are:

1. Smith's store no. 175 operating under the ``Smith's Food & Drug

Centers'' trade name, located at 1600 E. Pershing Blvd., Cheyenne,

Wyoming 82001 (Laramie County); and

2. Smith's store no. 176 operating under the ``Smith's Food & Drug

Centers'' trade name, located at 3745

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East Lincoln Way, Cheyenne, Wyoming 82001 (Laramie County).

The one supermarket that the Proposed Respondents must divest to

Albertson's in accordance with the agreement between Kroger and

Albertson's dated March 31, 1999, is:

1. Kroger store no. 27 operating under the ``City Market'' trade

name, located at 760 Price River Dr., Price, Utah 84501 (Carbon

County).

The five supermarkets that the Proposed Respondents must divest to

Fleming in accordance with the agreements between Kroger and Fleming

dated March 31, 1999, and April 7, 1999, are:

1. Kroger store no. 24 operating under the ``City Market'' trade

name, located at 401 N. Center, Rock Springs, Wyoming 82901 (Sweetwater

County);

2. Kroger store no. 23 operating under the ``City Market'' trade

name, located at 400 Uinta Drive, Green River, Wyoming 82935

(Sweetwater County);

3. Kroger store no. 9 operating under the ``Fry's'' trade name,

located at 1519 W. Gurley Street, Prescott, Arizona 86305 (Yavapai

County);

4. Smith's store no. 305 operating under the ``Smith's Food & Drug

Centers'' trade name, located at #85 South Hwy. 92, Sierra Vista,

Arizona 85635 (Cochise County); and

5. Kroger store no. 47 operating under the ``Fry's'' trade name,

located at 2600 W. 16th Street, Yuma, Arizona 85364 (Yuma County).

From the time Jobsite merges with and into Fred Meyer until the

divestitures have been completed, the Proposed Respondents are required

to maintain the viability, competitiveness, and marketability of the

assets to be divested, must not cause their wasting or deterioration,

and cannot sell, transfer, or otherwise impair their marketability or

viability.

The proposed consent order specifically requires that the

divestitures occur no later than twenty days after Jobsite merges with

and into Fred Meyer and Fred Meyer becomes a wholly-owned subsidiary of

Kroger or four months after the Proposed Respondents signed the

proposed consent order (April 29, 1999), whichever is earlier. The

proposed consent agreement also requires Kroger to include rescission

provisions in its upfront buyer agreements that allow it to rescind the

transaction(s) if the Commission, after the comment period, decides to

reject any of the upfront buyers. If Kroger divests the supermarkets to

be divested prior to the date the proposed consent order becomes final,

and if, at the time the Commission decides to make the proposed consent

order final, the Commission notifies Kroger that any of the upfront

buyers is not an acceptable acquirer or that any of the upfront buyer

agreements is not an acceptable manner of divestiture, then Kroger must

immediately rescind the transaction in question and divest those assets

within three months after the proposed consent order becomes final. At

that time, Kroger must divest those assets only to an acquirer that

receives the prior approval of the Commission and only in a manner that

receives the prior approval of the Commission. In the event that any

Commission-approved buyer is unable to take or keep possession of any

of the supermarkets identified for divestiture, a trustee that the

Commission may appoint has the power to divest any of the supermarkets

or properties in the markets alleged in Paragraph 13 of the complaint

that the Proposed Respondents own to remedy the anticompetitive effects

alleged in the complaint.

The Commission's goal in evaluating possible purchasers of divested

assets is to maintain the competitive environment that existed prior to

the acquisition. When divestiture is an appropriate remedy for a

supermarket merger, the Commission requires the merging parties to find

a buyer for the divested stores. A proposed buyer must not itself

present competitive problems. For example, the Commission is less

likely to approve a buyer that already has a large retail presence in

the relevant geographic area than a buyer without such a presence. The

Commission is satisfied that the purchasers presented by the parties

are well qualified to run the divested stores and that divestiture to

these purchasers poses no separate competitive issues.

For a period of ten years from the date the proposed consent order

becomes final, Kroger is required to provide notice to the Commission

prior to acquiring supermarket assets located in, or any interest (such

as stock) in any entity that owns or operates a supermarket located in,

Cochise, Yavapai, or Yuma counties, Arizona; Laramie or Sweetwater

counties, Wyoming; or Carbon County, Utah. Kroger may not complete such

an acquisition until it has provided information requested by the

Commission. This provision does not restrict Kroger from constructing

new supermarket facilities on its own; or does it restrict Kroger from

leasing facilities not operated as supermarkets within the previous six

months.

For a period of ten years, the proposed consent order also

prohibits Kroger from entering into or enforcing any agreement that

restricts the ability of any person that acquires any supermarket, any

leasehold interest in any supermarket, or any interest in any retail

location used as a supermarket on or after January 1, 1998, to operate

a supermarket at that site if such supermarket was formerly owned or

operated by Kroger in Cochise, Yavapai, or Yuma counties, Arizona;

Laramie or Sweetwater counties, Wyoming; or Carbon County, Utah. In

addition, Kroger may not remove fixtures or equipment from a store or

property owned or leased in Cochise, Yavapai, or Yuma counties,

Arizona; Laramie or Sweetwater counties, Wyoming; or Carbon County,

Utah, that is no longer in operation as a supermarket, except (1) prior

to a sale, sublease, assignment, or change in occupancy or (2) to

relocate such fixtures or equipment in the ordinary course of business

to any other supermarket owned or operated by Kroger.

The Proposed Respondents are required to provide to the Commission

a report of compliance with the proposed consent order within thirty

days following the date on which they signed the proposed consent and

every thirty days thereafter until the divestitures are completed.

Kroger is required to provide to the Commission a report of compliance

annually for a period of ten years. The obligations of Jobsite under

the proposed consent order will terminate upon consummation of the

proposed acquisition.

V. Opportunity for Public Comment

The proposed consent order has been placed on the public record for

60 days for receipt of comments by interested persons. Comments

received during this period will become part of the public record.

After 60 days, the Commission will again review the agreement and the

comments received and will decide whether it should withdraw from the

agreement or make the proposed consent order final.

By accepting the proposed consent order subject to final approval,

the Commission anticipates that the competitive problems alleged in the

complaint will be resolved. The purpose of this analysis is to invite

public comment on the proposed consent order, including the proposed

sale of supermarkets to Nash-Finch, Alberton's, and Fleming, in order

to aid the Commission in its determination of whether to make the

proposed consent order final. This analysis is not intended to

constitute an official interpretation of the proposed consent order nor

is it

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intended to modify the terms of the proposed consent order in any way.

By direction of the Commission.

Donald S. Clark,

Secretary.

[FR Doc. 99-14246 Filed 6-4-99; 8:45 am]

BILLING CODE 6750-01-M